Plans reduced by $1 will cost co. millions

SAN FRANCISCO (AP) — Online DVD rental company Netflix is lowering the price of its two most popular subscription plans by a $1 per month, giving up millions of dollars in revenue in an attempt to regain the upper hand in a cutthroat battle with rival Blockbuster.

With the reductions announced Sunday, Netflix will charge $16.99 per month for a plan that allows subscribers to keep up to three DVDs at a time with no limit on how frequently the discs can be mailed back in return for another movie. The price for a similar plan that lets customers keep one DVD at a time will fall to $8.99 per month.

The price cuts, which take effect Tuesday, match the fees charged by Blockbuster for similar online-only services.

Earlier this year, Los Gatos-based Netflix knocked $1 off two other plans that had previously cost $14.99 and $5.99 per month.

The latest changes will have a bigger impact on Netflix’s finances because the price reductions are being made on the two plans that are most widely used by the company’s 6.8 million subscribers. Netflix declined to specify how many subscribers use each plan.

Management is expected to quantify how much the price cuts will dent its future profits in conference call scheduled this afternoon to be held after the company releases its second-quarter earnings.

Netflix’s stock price has already dropped by 24% so far this year amid worries about tougher competition from Blockbuster and video downloading services offered by much larger companies like Apple and Amazon.com.

When Netflix last cut the prices of its most popular plans in late 2004, CEO Reed Hastings predicted the short-term financial pain would be worth the long-term market-share gains.

That prediction panned out. Netflix has added 4.5 million subscribers since lowering the price of its 3-DVD plan from just under $22 in November 2004. The company is also making a lot more money, with earnings of $49 million last year compared to a $6.5 million profit in 2003.

But Netflix’s momentum has tapered off since Dallas-based Blockbuster unveiled a new option in its own online service late last year.

For an additional $1 per month, Blockbuster gives online subscribers the flexibility to return and check out some DVDs in its stores at no additional cost. That convenience represents a significant advantage over Netflix, where all DVD deliveries are made through the mail _ a limitation that means subscribers have to wait at least two days before receiving a new movie.

Netflix offers a selection of more than 2000 movies and TV series that can be streamed over Internet-connected personal computers for subscribers who don’t want to wait for their next disc to arrive in the mail.

Acknowledging Blockbuster has been eroding its market share, Netflix in April warned Wall Street that it won’t add as many subscribers this year as it originally envisioned.

Stepping up its attack on Netflix also has been hurting Blockbuster, which has had to spend more heavily on DVDs to ensure sure its stores have enough discs to keep up with the additional demand from its roughly 3 million online subscribers. The company lost $49 million in the first quarter.

Blockbuster may not be willing to endure those kinds of losses much longer, especially with the recent hiring of a new CEO, James Keyes. In a Securities and Exchange Commission filing last month, Blockbuster said it will modify its online service “to strike the appropriate balance between continued subscriber growth and enhanced profitability.”

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